Article excerpt

When a company experiences financial distress, a control contest often follows. Management fights to remain in control of the company, and shareholders, creditors and others try to influence management's exercise of that control--or wrest it away. This is not a new phenomenon. The degree of influence now exerted by corporate stakeholders in the distressed context, however, is strikingly different than in the past.

Headlines like the one above highlight that stakeholder control issues are at the forefront of financially distressed situations large and small. The U.S. government, as creditor, dictated the terms of Chrysler's and General Motors' bankruptcies. It also demanded and received preferred stock from several troubled financial institutions, giving those institutions little time or flexibility to consider or reject the terms of the government's offer. And the U.S. government is not alone in using high-pressure tactics with distressed companies; stakeholders--particularly lenders and other significant creditors--employ such tactics consistently and routinely.

This Article analyzes the intensified contest for control in corporate reorganizations and whether, as a result, existing bankruptcy laws adequately protect the interests of all of a debtor's stakeholders. Efforts by a stakeholder to influence control often lead to conflicts of interests and multiple, competing demands on bankruptcy fiduciaries, i.e. debtors in possession and statutory committees. In theory, these fiduciaries should shun their personal interests and any undue influence by particular stakeholders. In practice, however, debtors and committees frequently are unable or unwilling to do so, and bankruptcy courts often do not learn of conflicts, if at all, until it is too late. Accordingly, this Article suggests the use of a third-party neutral to correct information asymmetry and promote objectivity and fairness in the bankruptcy process.

The Washington Post reported: "President Obama's harsh attack on hedge funds [that] he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker's debt." (2) The article was discussing the status of restructuring negotiations among the U.S. government, banks holding seventy percent of the secured debt, hedge funds holding a minority of the secured debt and Chrysler itself. The automaker filed for bankruptcy and ultimately sold most of its assets to the Italian automaker Fiat on terms negotiated by the U.S. and Canadian governments, the United Auto Workers, certain lenders and, to some extent, the company. …